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India’s progress towards having a Bankruptcy law and curbing black money – iPleaders


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This article is written by Upasana Dash from Madhusudan Law College, Odisha. This is an exhaustive article which deals with the Insolvency and Bankruptcy Code, 2016, and India’s progress towards curbing black money.

Insolvency and Bankruptcy Board in India was enacted on 1st of October, 2016 to regulate and counter several loans, increase liquidation for corporeal and incorporeal companies in India. IBBI, 2016 regulates Insolvency and Bankruptcy. If we notice the economic reforms in 1991, liberalization, privatization, and globalization were the three main aspects of the reforms. Companies got the right to enter the Indian market. Those policies were exclusively to enter into the market. 

Then in 2002, the Competition Act, 2009, Competition Commission in India came into force only to create competition between the companies in the Indian market. With these frameworks companies got two powers, right to entry, and right to compete, the only power left was light to exit. By which when a company gets bankrupt or insolvent, it will be easy in the process of liquidation. In 2016, the Insolvency and Bankruptcy Code got enacted, in essence, these companies got their right to exit from the market. In the perception of economists, this topic is very crucial to know more about Insolvency and Bankruptcy Code, 2016.

The Insolvency and Bankruptcy Code rules for, corporate insolvency resolution, corporate liquidation, individual insolvency resolution, and individual bankruptcy under the Code. It has been selected as the authority under the Companies [Registered Valuers and Valuation Rules ], 2017 for regulation and development of the profession of valuers in the country.

Insolvency and Bankruptcy Code is the substitution of several Bills or Acts to preserve in one Code.

Framework Of Insolvency And Bankruptcy Code 

IBC is divided into two categories i.e regulators and adjudicators. These two branches are further divided. Regulators are categorized into Insolvency and Bankruptcy Board of India and two bodies under adjudicators i.e National Company Law Tribunal and Debt Recovery Tribunal. Regulators regulate the procedures and Adjudicators resolve the process. IBBI is further classified into four classes i.e Insolvency Regulation Agency, Insolvency Professionals, Information Utilities. It regulates both the profession as well as the process.

insolvency

In the debt recast plan, IRA makes a code of ethics to complete the whole process. Insolvency Professionals control the companies for some days. Uday Kotak company was superseded by IL & FS by Insolvency Professionals. Information Utility gives plans and advice on how to initiate a debt recast plan. National Company Tribunals and for non-corporates (Individuals and partnership firms). Debt Recovery Tribunals helps in these. DLT was established in 1990.

Terms 

Insolvency- when a company becomes incapable of paying its debt, it is called insolvent.

e.g- Any bill that remains unpaid after the due date.

Bankruptcy- when any individual company or bank becomes unable to pay its debt on its due date, then it is called bankruptcy. This is the legal status of insolvency.

Liquidation- on the closing of companies, all the assets need to be clear. That is called liquidation.

Benefits  

  1. Ease of doing benefits- world bank declares ease of doing rate. India got 63rd rank before it was 77th rank. It helps a company to survive in the market.
  2. Banks and Asset Reconstruction Companies– when on the closing of a company, it can not repay its assets, liquidation occurs. Banks get money by decreasing NPAs. ARC buys bad loans from companies by recovering them. This law is very beneficial to banks and ARC in India.

Locked-up Assets 

When a company gets closed, there is a chance of locked-up assets, for example- the land area of buildings, employees. So with the help of insolvency and bankruptcy, all those locked-up assets get free.

Investments 

When time-bound law is imposed by this code, companies can easily exit from the market, so investments will rise.

Corporate bond market 

When the laws become stringent, corporate companies function very well, then the Corporate bond market will rise in India. Corporations will get more and more funds and gradually they can grow their business.

  1. Time-bound- According to IBC, all cases will sort out within (180+90) days.
  2. Comprehensive law- it covers companies, individuals, limited partnership firms.
  3. One law – all these causes comes within the purview of the Insolvency and Bankruptcy Code.
  4. IBBI- it regulates all the affairs within IBC. It constitutes a 10 member board that has RBI Governor, representatives to regulate and protect the investors and companies.
  1. Creditors or borrowers can approach NCLT / DRT to initiate the process of insolvency plea of 14 days.
  2. After admitting the plea, the lender will create a committee “Committee of creditors” which will appoint Insolvency Professionals. 
  3. After (180+90 days) COC will make a debt recast plan.
  4. If by voting, lenders will agree to adopt, otherwise the company will resolve all the assets will get distributed.

As per the record in 2019, to resolve in India, it needs 1.6 years.

Time to resolve Insolvency, World Bank:

  1. Institution to facilitate the resolution of Insolvency,
  2. Insolvency Professionals,
  3. Insolvency Professionals Agency,
  4. Information Utilities, 
  5. Adjudicating Authorities,
  6. Insolvency and Bankruptcy Board.

In March 2020, the government declared the minimum limit for invoking insolvency under the IBC to Rs 1 crore from 1 lakh, to promote small and medium enterprises. It aims to give time-bound resolution and licenses the creditors to start the insolvency process if a default occurs. Before the introduction of New Regulations, voluntary liquidation of the companies was regulated by the Companies Act, 1956

Issues 

The slow process in the resolution of distressed companies has been one of the major issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC. With 738 of 2,170 ongoing insolvency resolution processes having already taken more than 270 days at the end of March.

Pre-pack agreement

It is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. The process needs to be completed within 90 days so that all the stakeholders retain faith in the system.

Drawbacks of pre-pack agreement

The crucial drawback of a pre-packaged insolvency resolution is the reduced transparency compared to the CIRP as financial creditors would reach an agreement with a potential investor privately and not through an open bidding process.

Experts said this could lead to stakeholders such as operational creditors raising issues of fair treatment when financial creditors reach agreements to reduce the liabilities of the distressed company. The pre-packaged agreement is subject to approval by NCLT.

The Insolvency and Bankruptcy Code is concerned about the capital market, financial market, and taxpayers or citizens of India who have money in Indian Banks. bankruptcy in India is seen to be a shame, no one understands the term “Bankruptcy”. A strict mechanism should be there for bankers, suppliers, employees.

RBI declares 12 companies’ names of biggest loan distributors were referred to the IBC process Insolvency and Bankruptcy in June 2017. Some companies have been sold and banks have recovered a fair portion of the money and some have been dragged into litigation. Those 12 companies are as listed below:

  1. Bhushan Steel, 44, 478 Crores,
  2. Lanco Infra Tech, 44, 364 Crores,
  3. ESSAR Steel, 37, 284 Crores,
  4. Bhushan Power and Steel, 37, 248 Crores,
  5. Alok Industries, 22, 75 Crores,
  6. Monnet Ispat and Energy, 2, 115 Crores,
  7. Electro Steels Ltd., 10, 275 Crores,
  8. Era Infra Engineering, 10, 65 Crores,
  9. Jaypee Infra Tech, 90, 635 Crores,
  10. ABG Shipyards, 6, 953 Crores,
  11. Jyoti Structures, 5, 165 Crores,
  12. Amtech Auto, 14, 74 Crores.

Bhushan Steel group of companies have been sold to the TATAs, ESSAR Steel had a very large amount of loan from banks. Most importantly in such matters, many banks are involved including SBI. the steel industry that came through a revival globally. Steel prices pitched up, steel demand pitched up. ArcelorMittal made a bid of 42, 000 Crores plus for ESSAR Steel Company. They will become a valuable business again.

In India, capitalism is still maturing with all the judicial process ESSAR Steel Company has now gone for 600 days plus. This is a great deal of stress. Between March 2016 and January 2017, banks referred another 858 companies to the IBC process.

NCLT has more than 27 judges than the Supreme Court of India. NCLT has ordered the ESSAR Company operational creditor will get a proportional amount of money as that paid by the company by the new buyer.

In Anil Ambani Proceedings- the process will be initiated against Ambani as he had personal guarantees to his firms. He owns two companies; Reliance Communications Limited (RCom) and Reliance Infratech Limited (RITL). RCom approached for 565 crores and RITL for 635 crores from SBI. he had shown his list of assets worth more than 2000 crores. SBI gave 1,200 crores in 2016 to both the companies, RCom and RITL declared insolvent. The loans and assets of the companies were placed in the moratorium. SBI could not record his loans from companies. SBI had approached NCLT, NCLT appointed an Interim Resolution Professionals (IRP). by the method of proceedings, all the personal assets will be sold and the money will be recovered to SBI.

Progress of the restructuring and insolvency activity 

The Insolvency and Bankruptcy were enacted in 2016, its effect had been noticeable. As of February 2020, approximately 26, 250 cases have been fitted under IBC and 3600 cases have been admitted, 205 cases have been resolved, 890 have been ended with liquidation. The resolution period has been reduced from 4.3 to approximately 364 days under IBC. the gross NPA and in the financial year 2019 reduced to 9.1% from 11.2% in 2018. According to the resolving insolvency index under the “World Bank Ease of Doing Business Report, 2020”, India has secured the 52nd rank.

Section 5(26) of the Insolvency and Bankruptcy Code; a person who is not eligible under IBC to submit a plan for insolvency resolution of the corporate debtor shall not be a party in any manner to such compromise or arrangement. The liquidation process may be completed within one year. Secured creditors can not sell assets to a person barred from submitting an insolvency resolution plan [Section 29(A) of the Insolvency and Bankruptcy Code].

MS Sahoo, Chairman of IBBI, said, “Insolvency Professionals will have access to regulated support services”. Harish Kumar, Partner, L&L Partners, a law firms, said this would facilitate the functioning of IPs as the enhanced scope of service of such Insolvency Professionals Entities, as per the amended definition, would enable these entities to provide relevant support services to all IPs and not only those who are directors/partners of such IPEs as per the erstwhile definition.

Cross-border Insolvency is imposed by Section-234 and Section-235 of Insolvency and Bankruptcy Code, which gives reciprocal arrangements such as bilateral treaties that India can have with a particular country for initiating insolvency proceedings under Insolvency and Bankruptcy Code.

Cross-border Insolvency entails the protection of rights of foreign creditors who have rights on the assets of the debtors which may or may not be located in different jurisdictions. In January 2020, the Ministry of Corporate Affairs constituted a committee to suggest a framework for the smooth implementation of Cross-border Insolvency provisions under the Insolvency and Bankruptcy Code.

Initially, the enactment of Insolvency and Bankruptcy Code challenges to the resolution process at every step led to myriad litigation, which delayed the completion of the process. The Code will bring structural change in the banking system. Commercial consideration will drive the resolution process. This is a very good return which was under an old businessman gaming the system. It is good for bankers, in Indian Capitalism because Indian Capitalism needs to grow more. To reach a state where you do not find bankruptcy embarrassing or shameful, you first have to see a whole bunch of genuine clean bankruptcies.


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